Small businesses that have been in operation for a few years can reach a point when they feel that the time is right to take the next step and pursue business expansion. While the establishment may have a reliable client base and brand awareness to warrant expansion, many small businesses face barriers such as inadequate access to capital or funds.
Applying for a small business loan is the best way to make the dream of business growth come true. With this injection of a capital loan, companies can explore new options such as-
- Expand the current location or open a new one
- Hire more people to meet the growing demand
- Purchase new equipment or upgrade current appliances to increase production
- Introduce a new product or service to the market
No matter what an organization's goals or priorities are, a business expansion loan can introduce a wide variety of opportunities for small companies to scale up. Depending on the business' unique situation, there are various loan options to choose from, with different requirements and interest rates.
Is a Business Expansion Loan Right for Your Business?
Before applying for a small business expansion loan, owners will need to realistically examine their circumstances and ensure that acquiring a loan is a financially feasible option. There are 3 main questions business owners need to objectively ask themselves before exploring loan options.
1. What is the Reason or Motive?
Business owners need to gain an honest understanding of why they want to expand their business in the first place. They can start by laying out all of the reasons why they're pursuing an expansion project and ensure they are not seeking additional business funding just because they can. Management should have full control of daily business operations and feel confident in their profitability before attempting to open new locations.
2. What is the Return on Investment?
While business expansion may seem like an attractive opportunity, the math has to add up before pursuing any additional funding. Applicants will need to prove to lenders that expansion efforts will be profitable by analyzing all potential costs and detailing how new locations will affect the bottom line. There should also be a growing demand from the target customer base in order to justify an expansion project.
3. Is the Expansion Plan Manageable?
With expansion also comes the challenges of scaling business operations. Owners should examine whether the establishment will need to hire a partner or additional management to assist in expansion efforts.
7 Types of Loan Options & How to Qualify
There are several paths available when seeking expansion funding. It's important to have a full understanding of the business' long term goals as well as current financial standing in order to find the most beneficial loan option for the given circumstances. While there are many alternative options for business financing loans, the following 7 types are among the most commonly sought out by business owners.
1. Traditional Term Loans
Traditional term loans are one of the most common types of business expansion loans for small businesses. Small business owners borrow a specific amount of money upfront which must be repaid with interest over a predetermined period of time. This option is most beneficial for businesses with general working capital requirements, and inventory and workforce investments, renovation projects.
With a traditional term loan, you can borrow anywhere from $25,000 - $500,000 and can receive the loan in as little as two days. The term of the loan usually lasts anywhere between 1 to 5 years but it's important to be mindful, as the interest rates can range anywhere from 7 - 30% depending on the principal amount borrowed.
To qualify for this loan type, a track record of two years in business plus a personal credit score of 620 and annual revenues of at least $100,000 are required.
2. SBA Loans
The Small Business Administration (SBA) is run by the government and offers loans of up to $25 million to small businesses with personal credit scores of at least 680. SBA loans are a great way for small businesses to receive substantial cash advances to purchase the necessary land, equipment, and staff needed to fund their expansion projects.
The term of an SBA loan can range from 5 - 25 years with interest rates starting at 6.5%. Small business owners need to be wary of moving quickly as an SBA loan can take at least three weeks to be approved. The applicants must also demonstrate having been in operation for four years with annual revenues of at least $180,000 to be eligible to qualify for this loan type.
3. Equipment Financing
Small business owners that can demonstrate annual revenues of $130,000, a credit score of 630 and a business record of at least two years are qualified to purchase new equipment through equipment financing.
This loan will cover the cost of the new equipment, which the business will eventually have to pay back, including accrued interest. This loan enables small business owners to borrow up to the total value of the equipment and have until the expected life of the equipment to pay it back. This loan can be secured in as little as two days, however, interest rates can be high, ranging from 8-30%.
4. Business Line of Credit
Like any line of credit borrowing system, a lending institution will loan business owners a predetermined amount of capital that the business can borrow at any time. Small business owners will only have to pay interest on the amount that they have borrowed from this line of credit, which can go as high as $1 million with interest ranging anywhere between 7 - 25%.
Terms can stretch from 6 months to 5 years but the best thing about this type of loan is that you can secure it in just 1 day. To qualify for this loan, small business owners will need to prove that they have been in existence for at least a year with annual revenues of $180,000 and a personal credit score of 630.
5. Short-Term Loans
This is a loan, up to $250,000, that will have to be paid back in the near future (3-18 months). A short-term loan is a great option for small business owners who just want to pay off their loans, which includes an interest rate of 10%, as quickly as possible.
Traditional banks typically don't offer this type of loan and small business owners will have to turn to online lenders to secure this financing, which can be granted in as little as a day. Qualifications required for a short-term loan include annual revenues of at least $150,000, a personal credit score of 600, and 2 years of proven business history.
6. Merchant Cash Advance
A merchant cash advance is a more unconventional type of loan as the business can borrow up to $250,000 and this principle is repaid back using a predetermined percentage of debit and credit card revenues.
This is a solid financing option for small business owners that process many credit and debit card sales. You can secure this type of loan in as little as a week and there is no loan term as the business will pay it back daily through these transactions. A track record of 2 years in business, as well as a credit score of 550 and annual revenues of at least $180,000, are all required for this financing option.
7. Invoice Financing
Invoice financing involves selling invoices to a lending institution to receive a loan amount making up the majority of the invoice (up to 90%). As collateral, the lender will then hold on to roughly 20% of the invoice until it is paid off. Once it has been paid, the lender will unlock the rest of the funds to the small business owner but they will still be on the hook for fees (usually 3% to start and an extra 1% for every week outstanding on unpaid invoices).
Small business owners that look to expand quickly can secure this loan in as little as a day but they will generally have to prove that they have been in business for at least a year, have a credit score of 600 or better, and show annual revenues of at least $130,000.